Experts differ on how to prevent rolling blackouts

When the state electrical grid operator warned Thursday that Texas could be hit with blackouts next summer in part because its cushion of reserve energy is less than hoped, reaction was swift – but all over the map.

“I worry that if there isn’t more of an emphasis on sounding the alarm, it won’t get fixed,” said Diane Liebmann, an attorney with Haynes Boone in San Antonio who has represented power companies before the state’s energy regulatory agencies.

Others were more skeptical of claims that Texas will not have enough power to keep the lights on, including Clarence Johnson, a veteran energy consultant and former director with the Texas Office of Public Utility Counsel, which represents consumers.

The experience thus far, he said, is that new power plants have been built in time to meet increasing demand.

“Generation has always shown up,” he said. “There is no reason to believe it won’t.”

At issue are the incentives – or perceived lack of them – for power companies to build new plants to meet demand in this fast-growing state. While many are planned, it’s unclear how many will actually get built.

Some worry that the “energy-only” market in Texas, which pays plant operators only for the power they supply, doesn’t offer companies enough of a return to reliably recoup the multibillion-dollar cost of building a new plant.

Every other energy market in the world, except Australia, operates a “capacity market” that pays generators a flat amount on top of the cost of the power, ensuring the necessary incentive to build new plants.

Generators like the guaranteed additional payments under that system, but they are passed along to consumers.

When Texas deregulated its energy market a decade ago it had plenty of excess capacity and chose to create an energy-only market. Since then, however, reserves have continued to shrink.

In Texas and Australia, regulators have set price caps on what a generator may charge for wholesale power during periods of peak demand, but Australia’s cap is five times higher than the Lone Star State’s. Those occasionally sky-high prices create enough of an incentive for companies to build, Liebmann said.

“There’s no stomach in Texas” for raising price caps to Australian levels, she said, nor is the Public Utility Commission of Texas, which regulates the industry, interested in creating a capacity market.

The commission is concerned, however, that prices may not be high enough to encourage new power plant construction. It is and looking for less drastic ways to tweak the system.

“The Commission would like to have as gentle a touch on the market as possible,” said PUC spokesman Terry Hadley.

The PUC recently approved higher minimum prices for wholesale power. It is considering raising the price cap of $3,000 per megawatt hour, among other potential changes to the system.

Johnson thinks the PUC should proceed with caution.

He noted that ERCOT historically has forecast lower reserve margins in outlying years than the grid actually ends up with – not because they’re doing anything wrong, but because it is difficult to forecast new capacity.

Reserve margins aren’t intended to guarantee that there’s never a blackout, he said, but to provide a cushion to meet the range of most expected weather outcomes.